Market Place; Individuals Stay Unafraid of Stocks

By Floyd Norris

Published: October 31, 1989

SMALL investors, far from being scared by market volatility, seem to see it as an opportunity this year. Some mutual fund managers said yesterday that there was a net flow of cash into funds in October, when the Dow Jones industrial average plunged 190 points in a single day.

''Our stock fund sales are up about 15 percent over September,'' said Jane Nelson, a spokeswoman for the T. Rowe Price group of mutual funds, which markets directly to investors. Mrs. Nelson said redemptions of fund shares - withdrawals of cash - fell so that the net cash inflow into T. Rowe Price equity funds was up about 50 percent in October.

''Our investors overwhelmingly felt the market would come back,'' said Michael Hines of Fidelity Investments, referring to results of a poll taken over the weekend after Oct. 13, the day of the steep fall. He said that while money was withdrawn from equity funds that weekend, the cash flow has been more positive since then, although Fidelity equity funds will have a net cash outflow for October. He added that the number of new accounts investing in equity funds was up sharply from September.

Mutual funds that are sold through brokers seem to have done less well, perhaps indicating that the more independent investors who use the direct-marketing funds were more willing to bet that the fall on Friday the 13th, and the subsequent volatility, were not a precursor of another market crash.

''The only equity funds that have been selling well for us are balanced funds,'' said John F. Reilly, a spokesman for the Massachusetts Financial Services Company, which markets through brokers. Balanced funds, which include bonds as well as stocks, tend to be bought by investors seeking low-risk investments that will still participate in a stock market rally.

But while broker-sold funds are not drawing in much cash, neither are they seeing large outflows. ''We couldn't find any change in trend after Oct. 13,'' said John M. McAllister, a spokesman for the Keystone Group Inc. ''Surprisingly, the investor wasn't very much affected by Oct. 13.'' Over all, Keystone's equity funds saw redemptions about equal to purchases in October.

The comments on October sales came as the Investment Company Institute, a trade group, reported on sales of mutual fund shares in September. That report showed that investors became more cautious about stock funds in September, withdrawing a net $507.6 million from such funds, after putting in $674.1 million in August. The figures include sales and redemptions, as well as transfers between different funds within the same group, but do not include dividends that are automatically reinvested.

The entire drain from equity funds in September came from transfers between funds. Those transfers, by investors who seek to time the market, took $800.1 million out of equity funds. Such fund switchers have a reputation for poor timing, but in this case, they seem to have done well, getting out before the October market problems. But the flow of cash from investors who do not switch between funds continued to be positive in September, with sales exceeding redemptions by $292.5 million in the month. That extended to six months the string of net cash inflows from such investors, after seeing outflows for 18 consecutive months after the 1987 crash.

The professionals who manage mutual funds remained dubious about the prospects for equity markets for much of 1989, and they raised cash levels in stock funds consistently through the summer, from 8.7 percent of total assets in March through 10.2 percent in August. But in September, in a bit of poor market timing, they put some of that cash to work, and the level of cash fell to 9.8 percent.

Investors may even be getting more venturesome since Oct. 13. Mrs. Nelson of T. Rowe Price said sales of its New Horizons Fund, which invests in small growth companies, had ''a big advance in sales and positive cash flow'' in October, after being unpopular with investors earlier in the year.

The sharpest outflow of cash from mutual funds in September came in ''junk bond'' funds, which saw a net outflow of $981.5 million, or 2.9 percent of average assets. In percentage terms, that was the worst month since the 1987 crash, and it appears that this month will be worse. The Investment Company Institute said a survey of 30 members, representing 74 percent of junk-bond fund assets, indicated an outflow of about 3.7 percent through Wednesday.

The junk-bond market has been roiled by bad news, but while many investors are getting out, a large number of other investors seem to be willing to take a risk that the market will rebound. Both T. Rowe Price and Fidelity reported strong sales for their junk funds, though not strong enough to offset the redemptions.